4 ways to build a billion-dollar dot-com

Asheesh Advani, CEO of Covestor and member of the CNBC-YPO Chief Executive Network

Thursday, 10 Jul 2014 | 8:00 AM ETCNBC.com

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In the same way we learned more than a decade ago that being a dot-com was not in itself a guarantee of success, today we're learning that not all Internet marketplaces gain traction.

So the question is, Why do marketplaces such as Zillow, Airbnb and Uber disrupt their industries, while others stumble?

If there were a foolproof formula, all marketplace opportunities would already be occupied and the world would be a much more efficient place. As I'm in the marketplace-building business, I've deconstructed dozens of marketplaces—successful and not—to analyze what conditions need to be present for a marketplace to take hold.

Here's my list of the four main drivers of online marketplace opportunity—as well as the seeds of destruction for marketplaces that won't work.

Frederic Cirou | PhotoAlto | Getty Images

1. Transparency is key, but don't overdo it.

Transparency is arguably the biggest benefit of any marketplace. Think of home buyers comparing prices in a neighborhood and seeing historical sales data trends on Zillow. Or consumer sites like Etsy, which compile a rich variety of homemade goods with comparison-shopping tools. Transparency—from what school district a home is in to what's being made at the kitchen tables of creative craftspeople around the world—is one of the remarkable advances of our lifetime.

But the flip side of transparency is too much information or too much unqualified information. For sites selling consumer products, this can manifest as an abundance of items without the right tools for product selection. Even the most do-it-yourself types of consumers often want some minimal level of guidance to make choices online.

2. Fragmentationisn't enough—it's just a starting point.

Marketplaces that have emerged in recent years, like 99designs, Elance and TaskRabbit, have addressed the needs of ultra-fragmented markets. In these marketplaces, individual contractors or freelance workers are able to cast a wide net to find the people who need their services. Both buyers and sellers get access to many more people than they would have found before. These marketplaces spare the working mom the trouble of interviewing nine chemistry tutors and help small-business owners locate just the right outsourced contractor, such as a low-priced overseas computer coder who can make projects like Web redesign affordable.

The danger here is leakage. Once the contractor and the consumer make their initial connection on the marketplace, there may be no reason for them to continue to use it to arrange future transactions unless some incentives are built in. Businesses such as Care.com, which puts parents in touch with babysitters, for instance, may find parents will use the service for a month or two, find a nanny and then are gone forever.

"Technology simplifies many of life's chores, but focus too much on simplicity and you may lose sight of the fact that consumers are living, breathing people who respond to colorful images, clever design and good old-fashioned marketing."-Asheesh Advani, CEO of Covestor

3. Target a high cost of doing business, but don't become that cost.

One reason consumers and suppliers alike want transparency is because they believe casting a wide net will deliver some sort of savings, whether it be a cheaper airfare, a lower mortgage rate or simply the convenience of finding a just-right crocheted hat without having to drive all over creation to find it.

Here's the catch: To be really successful, the marketplace has to be able to consistently reduce costs on both sides of the transaction. Otherwise, it can have the opposite effect of creating an increased cost of doing business. Consider a digital platform that purports to be a marketplace but is really a marketing referral model and therefore represents an extra middleman rather than being a direct link between suppliers and customers.

This became a problem for many financial services marketplaces that promised to put the consumer in control by helping them compare rates for home loans or insurance products. These marketplaces really had business models based on fees for lead generation. Remember the promise of LendingTree.com: "When banks compete, you win"? It worked well when there was a brisk mortgage market, but when the mortgage market dried up, there was no reason for banks to pay for leads, and the model had to be reconsidered.

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4. A technology business can't thrive without a human touch.

Technology simplifies many of life's chores, but focus too much on simplicity and you may lose sight of the fact that consumers are living, breathing people who respond to colorful images, clever design and good old-fashioned marketing.

Some of my favorite online marketplaces are ones that have a human touch. Kickstarter, for example, is not only "the world's largest funding platform for creative projects," it's also a creative project in its own right, artfully curated in a way that draws in potential funders and keeps them on the site long enough to discover compelling new projects. Kitchensurfing is another site that works well, because it has taken great care with visuals: alluring photos of the fine cuisine that a chef will prepare at your own home.

Real-world lessons are critical, and we're working to incorporate them into our digital marketplace, which helps investors find investment managers. If you're an investor in markets with a high level of fragmentation and where there's a benefit to price and value comparisons, keep an eye out for emerging digital marketplaces. Watch out for ones with a delightful design and great tools for finding just what is needed. Those are the ones that can remake an entire industry.

—By Asheesh Advani, CEO of Covestor and member of the CNBC-YPO Chief Executive Network

CNBC and YPO (Young Presidents' Organization) have an exclusive editorial partnership. It consists of regional chief executive networks in the Americas, EMEA and Asia-Pacific. These networks are made up of a sample of YPO's unrivaled global network of 20,000 top executives from 120 countries who are on the front lines of the economy. The opinions of Chief Executive Network members are solely their own and do not reflect the opinions of YPO as a whole or CNBC.